shock that banks can raise spreads on home loans

How High Will Sibor Go In 2016?

As 2015 draws to a close, it is that time of the year to take stock, look ahead and anticipate market trends and interest rate movements in 2016.

This year has been tumultuous year for stock markets worldwide ending the year at more or less the same level where it started or in Singapore’s case much lower by 14.3%.  The devaluation of the yuan in the second half of the year largely caught market by surprise and signaled how serious the slowdown in the world’s second largest economy and how it can have widespread repercussions across the globe.  That theme is set to continue.  Just when most central banks continue to pump-prime their respective economy through quantitative easing of sorts, US remain the single bright spot where labor market has improved significantly enough in 2015 for the US Fed to finally make its first historical rate hike in almost a decade by upping funds rate by quarter of a percent to the 0.25 to 0.5% range, thereby removing one major uncertainty plaguing the market for the past year.

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How will 2016 shape out for homeowners in Singapore in terms of borrowing costs?  Or more precisely the question is how fast will the pace of rate hikes be when there are still pundits predicting that Fed will be forced to make a U-turn sometime mid of 2016?  On the other hand there are analysts predicting four rounds of 0.25% rate hikes per quarter in the US leading to 3-month Sibor here hitting 2% by end of 2016.  They based their forecast largely on Fed’s own estimate of the funds rate to hit 1.4% by end-2016 from the current levels of around 0.4%.

The truth probably lies somewhere in between.  As what I have always advocated, there is no point getting too hung up on analyst’s forecast based on some kind of economic or financial modeling.  When another major event suddenly unfolds like the 2014’s oil price crash or yuan’s devaluation this year, all the underlying assumptions and projections are dismantled.  Such forecasts are only as good as at one point in time.  Rather we like to look the broader trends or significant factors with more last-lasting effects.

Oil price will continue to stay low for a while more but will definitely rebound the moment OPEC decides to finally cut supply after enough of its competition has been wiped out in the US – the shale oil producers.  You can say that the current prices are artificially held low.  However from what I am reading it may not be so simple as the American producers are smart enough to just leave the oil wells in a “hibernate but ready-to-go” state so they can easily ramp up production the moment oil price recovers.  This protracted tussle between the oil-producing countries might play out much longer than just one more year which is what most analysts are predicting, especially now that US Congress has just passed a bill to allow exports of oil after a 40-year ban and US has now become an oil-exporting country.  There will be more casualties from the oil & gas as well as commodities sector leading to job losses.

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In a serendipitous way as long as oil price continue to stay depressed for next 1 to 2 years perhaps, it will continue to support a US economy on a recovery path with higher disposable income, lower transportation costs leading to more domestic travels and negligible imported inflation.  The only other major risk now is the slowdown in Chinese economy and honestly that is a tough one to make a call.  Personally I do believe the Chinese government will do whatever it takes to rev up the engine of growth and they do have all the ammunitions to do that.  At some point it will reverse the decline albeit it will be GDP growth at a slower but more sustainable pace.

All in all, our view is that interest will be on a slow rise with all the uncertainties still lingering, coupled with likely volatile stock markets this year from the fallout of oil & commodities sector.  The 2 key factors driving 3-month Sibor in Singapore is the federal funds rate and the strength of the dollar which are both positively-correlated.  Hence at MortgageWise we think the most important indicator to watch in 2016 is inflation in the US and its pace of increase.  To this end, with all the uncertainties we just discussed, we do not think inflation will be aggressive therefore it will be hard for US Fed to justify four rounds of increases next year as what analysts predicted.

We are going to speculate possibly only 2 rounds of quarter percentage points which means a climb of 0.50% in federal funds rate as well as Sibor in 2016 to reach the range of 1.5-1.8% p.a. by end of 2016.  That would also mean the prevailing (floating) interest rate in Singapore will reach 2.6-2.7%.  Another way to look at it is to study the trending of Sibor over the past 30 years.  Typically in an interest upswing cycle, it will take around 3 years for it to rise up by 300 basis points or 3%, that would be 1% per annum.  However we are in this unprecedented post-Great Recession period where Fed has ballooned its balance sheet by pumping hundreds of billions into the banking system through three rounds of Quantitative Easing over the past 5 years since QE1 first started in Dec 2009.  If we assume that it will take double the time to “mop up” all this liquidity, that means the funds rate and hence Sibor will now rise by the same 3% over 5-6 years which translates to 0.5% p.a. increase per year for the next 5 years.

Homeowners should stay vigilant and keep watch on rising interest and adjust their home loan packages in response accordingly.

 

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with successful careers in banking & real estate before becoming an entrepreneur.
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